Fidelity National finds ‘synergies’ in $2.9B deal to buy LPS

Fidelity National Financial Inc. isn't saying exactly when it decided to look into reacquiring Lender Processing Services Inc., a business it had owned from 2003 through 2006.

However, Fidelity officials did say that the resolution of LPS' legal issues related to the nationwide foreclosure mess played a role in the timing of the two companies' merger agreement.

"I think it's fair to say that was an area we needed to understand better," Fidelity CEO George Scanlon said in an interview Tuesday after Fidelity announced a $2.9 billion agreement to buy LPS.

After investigations lasting more than two years by federal and state authorities, LPS has settled with nearly every U.S. state and the U.S. government on charges that one of its subsidiaries falsified documents used in foreclosure proceedings. LPS announced earlier this year it was paying penalties totaling more than $150 million to state and federal authorities.

"That brought further clarity to it," Scanlon said.

Scanlon said he couldn't comment on when Fidelity began negotiating to buy LPS but in a conference call with analysts Tuesday, Chairman Bill Foley said it had been "more than 90 days."

Foley also indicated that Fidelity may have been interested in reacquiring LPS for longer than that.

"We were very concerned about litigation over the last couple of years. We became less concerned about it during this due diligence process and we really feel like they got their litigation risk basically behind them now, with a few exceptions," he said.

LPS still has some outstanding legal issues remaining, but Foley said he believes the company has set aside adequate reserves to cover any additional penalties. LPS set aside $271 million in reserves in 2011 and 2012 to cover legal costs.

Despite the legal expenses, LPS has remained profitable and Fidelity officials say the merged company can be more profitable because of cost savings from combining the two companies' operations, which both are headquartered at the same office complex on Riverside Avenue.

Foley said the company expects to achieve at least $100 million in annual cost savings, and likely more than that, once the deal is completed.

That means there will be jobs lost, including at the top of both organizations.

"Part of synergies means there will be some changes to management on both FNF's side and on the LPS side," Foley said.

Fidelity currently employs a total of about 60,000 people, including 800 in Jacksonville. LPS employs 7,538, with 2,656 in Jacksonville.

Scanlon said it's too early to get into detail on where the cuts will come.

"We've got a lot more work to do in that area," Scanlon said.

The merger agreement includes a "go-shop" provision that allows LPS to seek higher offers until July 7. Scanlon said the company won't get too deep into operational details until that deadline passes.

It is possible that another offer will come in. LPS Chief Executive Hugh Harris said in an interview that the company did talk to some other interested parties before agreeing to the deal with Fidelity, but he did not give details.

Some investors are betting on a higher offer, as LPS' stock traded as high as $34.14 on Tuesday.

Harris said LPS has not talked with Fidelity about possible job cuts after the merger is completed. "We haven't had any conversations with them on any of that," he said.

He expects LPS to be involved in the discussions, but Fidelity is "going to be the driver."

Scanlon said possible cuts will go beyond the Jacksonville operations of the two companies. "The great majority of our operations are outside of this area," he said.

Foley said Fidelity wanted to acquire LPS, which provides technology services for mortgage lenders, because of its "highly recurring revenue and cash flow."

Fidelity's main business, title insurance, is very cyclical, moving up and down with the housing market, so the company has always invested in other businesses that have a more consistent revenue stream.

Fidelity originally acquired the LPS business from Alltel Corp. in 2003 for that reason but after a couple of years, it thought Wall Street was undervaluing its businesses.

In order to increase shareholder value, it combined LPS and other financial technology businesses it owned and spun them off as a separate public company called Fidelity National Information Services Inc. in 2006. Fidelity National Information then spun off LPS in 2008.

"Because of this history, we believe the acquisition of LPS is a strong strategic fit for our company," Foley said.

Harris said LPS and Fidelity fit together because both companies' main businesses are involved in the homebuying process.

"The move back to FNF is more focused on the real estate transaction business," he said.

Foley said LPS shareholders should be happy with the deal.

"It has the potential to be a win-win for LPS shareholders and also for FNF shareholders," he said.

The deal is structured so that LPS shareholders will receive a combination of cash and FNF stock, and Foley said LPS shareholders will benefit if FNF's stock rises in price.

The agreement has a baseline of 50 percent cash and 50 percent stock, but that could be adjusted according to certain formulas, depending on what happens to FNF's stock price by the time the deal closes.

"It was very complicated, but our team did a great job. Our advisers did a great job," said Scanlon.

"We tried to make it as understandable and straightforward as possible."